Finance Committee on Feb. 28th, 2013

[Shawn Porter]

There may be two questions in that.

In the August 2011 release, essentially any upstream loan in place at that time was deemed to have been made in August 2011, giving those taxpayers essentially a two-year window to restructure their affairs, to repay the loan, to do whatever to take themselves out of the effect of the rule.

[Brian Jean, Conservative, Fort McMurray—Athabasca, AB]

If they hadn't repaid it by that time, it has another two years in there, to 2016, doesn't it? Then it automatically deems back to 2014 if it's not paid within that period of time.

[Shawn Porter]

Yes, but I have a couple of clarifications on that point.

As a result of the consultations, a number of firms and organizations indicated that two years was an insufficient runway to complete the restructuring. Some of these loans have been in place for a number of years and it wouldn't be that easy to arrange for the refinancing.

One of the significant amendments between the August 2011 release and what's in Bill C-48 is that essentially a five-year runway was provided. To tie that into the dates, taxpayers have until August 2016 to clean up the loans in place in August 2011. The mechanism that was used was to say that in August 2014, we'll deem those loans to have been made, and that starts the two-year clock, which in effect takes the restructuring or the grace period up to August 2016.

[Brian Jean, Conservative, Fort McMurray—Athabasca, AB]

That certainly seems reasonable.

The final question I have for you is on distributions from a foreign affiliate and the qualifying return of capital election. Could you explain that in more detail? It got a little fuzzy there near the end.

[Shawn Porter]

This is, in the main, a very well-received measure. There are all sorts of legal complexities given the different types of corporate law that one encounters in a range of foreign jurisdictions. As to whether money that comes out is a return of capital, is a return of something that Canadian corporate law would regard as paid-up capital or legal stated capital, or whether it's divided, these private law determinations are necessary as a prerequisite to applying Canadian tax rules.

Therefore, simplifying rules were introduced generally to say that most distributions out of a foreign affiliate, other than something that is expressly return of capital, or something that comes out in the course of dissolution, is a dividend. That is one simplifying point. Then with respect to returns of capital, provisions have been made to enable Canadian taxpayers to get at their investment first, before they would have to bring back surplus pools, without any underlying tax attached to them.

Generally speaking, what comes out of a foreign affiliate is exempt surplus. Then taxable surplus comes. Taxable surplus pool is the one that could result in additional Canadian tax on repatriation. Once you've exhausted those pools, you're then into a notional pool of pre-acquisition surplus, which is essentially return of your capital.

These rules now facilitate an ability to elect to skip over the taxable surplus pool or the new hybrid surplus pool. That is a relieving and taxpayer-friendly provision. Those pools would usually result in residual Canadian tax being paid. That residual Canadian tax can be deferred further by making an election to get at a qualifying return of capital, to essentially get at the shareholder's investment first, ahead of the low-taxed surplus pools.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Porter and Mr. Jean.

We'll go to Mr. Côté, please.

[Raymond Côté, NDP, Beauport—Limoilou, QC]

Thank you, Mr. Chair.

To follow up on my colleague Guy Caron's comments about the goodwill amount, let me remind you about the GlaxoSmithKline affair. Determining the intangibles that might be part of the value of a licence agreement potentially has a number of implications. There are things like guaranteed access to new products, the right to be supplied with raw materials and bulk products, support for commercialization, technical assistance for establishing new lines, and so on. Those things cannot necessarily be calculated in terms of the costs and the profits brought in by the product in question.

Do you feel that factoring in the goodwill amount as part of a company's eligible capital creates a precedent? Evaluating the value of a brand, its intangible value, that is, could let businesses get away with not paying taxes.

[Shawn Porter]

The reference to the recent Supreme Court decision in GlaxoSmithKline is outside the scope of Bill C-48. It is a recent decision. It concerns transfer pricing. The decision of the court was to refer the case back to the tax court for reconsideration, given direction that the Supreme Court had given. However, it has nothing to do with the subject matter of Bill C-48.

[Raymond Côté, NDP, Beauport—Limoilou, QC]

Okay.

Let me move to another subject, gifts and contributions.

Once more, there might be a lack of clarity here. We see the terms “market value”, “fair market value” and “fair value”. Of course, it is always difficult to know what that is. I understand the need for some flexibility, but the ambiguous terms and the inherent complexity of it all may lead to errors and incorrect interpretations, whether deliberate or not.

With donated works of art, for example, how can we be assured that the principles are observed and that the value of the gift corresponds to the actual value of the item?

[Ted Cook]

I think what you're referring to is that there are some amendments in Bill C-48 that relate to charitable donations. Certainly it had come to the attention of the Department of Finance and the CRA that people were engaging in schemes where works of art or other articles would be purchased at one price, they would receive evaluation that the work of art was worth another price, and then donate it to a charity claiming a charitable donation for the appraised value of the work of art.

The charitable donation measure in Bill C-48 will be addressed by my colleague, Ed Short, who is chief of the personal and general income tax section.

[Edward Short, Senior Chief, Business, Property and Personal Income, Department of Finance]

The first point is that the term “fair market value” is used throughout the Income Tax Act. It's a question of fact as to what the market value of something is. It's generally speaking the amount that a willing buyer and seller will negotiate in an open market. There's nothing in the Income Tax Act that defines what this is, but it's essential that we use this term in various places to try to determine a valuation where there's not an exchange of cash. In the context of gifts, people can be allowed a tax credit for an individual if they make a donation, and the tax credit will be based on the fair market value of the property that's been transferred to the charity.

There are some difficulties in deciding what the value of a property is. There have been court cases that have gone different ways in the context of some of these tax shelter schemes. In some cases, there's been past jurisprudence where the courts have accepted the valuation that's been given by an appraiser to, for instance, a group of artwork that's been purchased at a low cost and then has been appraised at a high value and then donated. There have been others where the courts have gone the other way and said that the value of that artwork, in the cases in particular, is the bulk price that was paid by the promoter or arranged by the promoter.

Now there are provisions, as Ted has mentioned, in this bill, which try to address some of the schemes to take some of the guesswork out. What they do is say that if you are involved in a gifting arrangement, then if you make a gift within three years of a property that you've acquired for the purpose of making a gift of it, then the fair market value will be deemed to be the amount that you paid. That's one of the measures that's in the bill in respect of gifting arrangements.

[The Chair, Conservative, James Rajotte]

Thank you.

We'll go to Mr. Van Kesteren, please.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

Thank you, Chair.

Thank you all for being here. It's not the first time you've been here and probably not the last time you'll be here either.

When I look at the book, it's pretty intimidating, I must say. I don't know if you can give me an answer to this, but what proportion of taxpayers would be affected by this? The average person probably is not going to be affected by this, is he?

[Ted Cook]

Yes, it is a difficult question to address. Do you mean by the bill itself?

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

Yes.

[Ted Cook]

Certainly parts 1, 2 and 3 are aimed at particular taxpayer groups. Bijuralism, theoretically to the extent that you're reflecting both legal traditions in Canada, would have broad application.

We've just been talking about charitable donations. The flip side of the measures that my colleague has just spoken about is there are measures that allow split receipting, so that if you receive some benefit, like you attend a dinner or receive a golf game as part of your charitable donation, rather than having the donation rejected because you've received some benefit in respect of it, you can receive a receipt and make a charitable donation for that part. So that could be a broad application.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

Okay.

We keep getting calls to simplify the tax system. We've got to simplify. This looks like we're getting into this thing even deeper. Is this a move toward simplification? It's certainly a move toward job creation. I can see a lot of tax lawyers probably are pretty excited about this new bill, and anybody else in the tax business. Is it a move toward simplification?

[Ted Cook]

That question can be addressed at many different levels. As I indicated earlier, in terms of having draft legislation that has not been enacted, it makes life more difficult for both taxpayers and the CRA, for example, because they may file their tax returns based on the draft legislation but, for financial statement purposes, be required to reflect the law as it stands and perhaps make a note. In terms of compliance, this would make life simpler for people.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

Is it the first step toward simplification? We need to clear up these areas and now we can start to simplify—would that be a fair assessment?

[Ted Cook]

In terms of the implications of this bill, it has certainly represented a significant overhang in terms of the Department of Finance's work. This bill required a lot of work, and each iteration of it has required maintenance and checking and things like that. Certainly those are resources that are available for other things.

In terms of simplification, when we draft now, we try to adhere to modern drafting standards provided by the Department of Justice, and when we open up provisions, we try to clarify the law where we can. But I think the Canadian tax system has indicated a preference for precision, and precision necessitates a certain amount of complexity in the act.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

My constituents might come to me and say, “Dave, did you read that bill? I see you got that bill passed”. I didn't read it, and if I did read it, I probably would fall asleep in the first chapter if I got that far, and I probably wouldn't understand too much of it. I think that's probably indicative of most people in this place. We're passing a bill that has implications and an effect on people. How can I go back to my constituents and say this is the right thing? Maybe you could help the committee with that.

[Ted Cook]

I certainly read it.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

I know you did.

[Ted Cook]

For parts of it, this is the third time this bill has been before Parliament. It's consistent with the policy. The consultations have been undertaken in respect of the vast majority of it. In terms of how the tax system and tax law interact with individual taxpayers, certainly the CRA provides guidance. Tax law is ultimately reduced by the CRA and by the community at large into more digestible bits for people.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

Do you work in conjunction with, say, the OECD and organizations like that when you formulate this?